“We already know a bit about how the average investor behaves, in terms of the risk they’re willing to take on and the returns they hope for. There might be opportunities to use this knowledge to guide households into making better financial choices,” says Célérier, whose research examines household welfare and makes sense of trends in financial services, products and innovation.

She’s already found evidence of how banks consider consumer behavioural biases when designing new investment products. In a recent paper, published in the Quarterly Journal of Economics, Célérier describes how investors tend to be interested in higher-yield investments when interest rates are low — and banks often respond by developing more complex investment products that ‘promise’ higher returns but also embed more risk.

In other words, banks investigate how customers think and behave and develop products that cater to their preferences. But what’s most exciting, says Célérier, is the potential to use this type of knowledge to guide households in making better financial decisions.

“We already know a bit about how the average investor behaves, in terms of the risk they’re willing to take on and the returns they hope for. There might be opportunities to use this knowledge to guide households into making better financial choices.”

-Claire Célérier, Assistant Professor of Finance

In her next paper, she is looking at how financial institutions can design products that ‘nudge’ household consumers — who tend to be risk-averse and usually miss out on promising investment opportunities by being too conservative — into participating in stock-market investing.

There are various other financial innovations and new approaches that can contribute to household wealth accumulation and well-being, Célérier adds. For instance, the emergence of mobile, low-fee banking services removes barriers that low-income households previously faced in setting up saving and chequing accounts. These affordable banking options are significant, given that more than a third of low-income American households do not have bank accounts established.

As well, Célérier is interested in how having medical insurance might potentially boost a household’s access to credit and contribute to their wealth accumulation. Specifically, she wants to know whether banks should begin taking medical coverage into account and lend more to insured customers, as they might be at lower risk of defaulting.

In the meantime, for average consumers who want to build wealth and start investing, she offers some general advice.

“Make sure that you understand what you are investing in. Complex financial products are often obfuscating risk.”

The first step involves deciding what to invest in — whether it will be stocks, bonds or a combination of different products, she explains. From there, consumers need to consider their strategy. In general, the simplest product is usually the best choice.

Finally, household investors should understand the possible range of outcomes, she warns.